DoD Eyes $2 Billion in Outsourcing

By Nick Wakeman, Staff Writer

During the next three years, the Army, Navy and Air Force are planning to compete about $2 billion worth of information technology functions, but many of those contests will pit government entities against private companies.

The three military branches are using the A-76 process to evaluate about 293 projects that represent about 29,000 IT jobs, according to a new study by Federal Sources Inc. of McLean, Va.

A-76 is an Office of Management and Budget document that dictates how agencies should look at non-core functions, such as IT, and decide whether it is most effective to keep the function in house or to outsource it to the private sector.

If history is an indication, about half of the projects the military branches are examining will go to the private sector, and the other half will stay internal, said Beth McElroy, a senior consultant with Federal Sources. "Our conservative estimate is that at least $1 billion will go to the private sector," she said.

Logistics and base operations are the functions with the biggest dollar potential, because they involve the most people. "The number of people is where the real value is," McElroy said. Both logistics and base operations represent about 31 percent of the jobs under review, or $620 million for each function, she said.

Automated data processing represents 13 percent, or $260 million in spending. Support services is 12 percent of the jobs, or $240 million. Training and simulation is 6 percent, or $120 million.

Of the $2 billion in projects that McElroy identified, the Army has the projects with the highest total dollar value: 55 percent, or $1.1 billion worth of projects. The Air Force has 25 percent, or $500 million; the Navy has 19 percent, or $400 million, she said.

"The military has been far more aggressive about outsourcing than the civilian agencies," said Steve Kelman, former administrator of the Office of Federal Procurement Policy at OMB and now a professor of public management at Harvard's Kennedy School of Government.

Because of budget cuts, the military has had to look at outsourcing as a way to free up funds for spending on weapons systems, said Andrew Fortin, who as manager of privatization policy at the U.S. Chamber of Commerce tracks the issue of government outsourcing.

"The military knew it needed to look from the top to the bottom to free up money, so they have taken the lead and changed how they operate," Fortin said.

The civilian agencies have not been as aggressive, which in part led to the passage of the Federal Activities Inventory Reform Act of 1998, he said. The FAIR Act requires agencies to give Congress inventories of non-mission functions that could be outsourced. The inventories were due to OMB by June 30, but the agency has yet to release any findings.

Because the FAIR Act inventories are not available yet, McElroy said she looked at other government documents to determine which agencies had the largest number of IT professionals and hence, the greatest potential as candidates for outsourcing.

The Federal Sources report notes 12 civilian agencies with the most IT workers. Treasury Department and Veterans Affairs lead with more than 40,000 IT workers each, McElroy said. "The opportunities on the civilian side are much longer range," she said.

Despite pressure from the FAIR Act, Kelman said he doubted there would be a mad rush by agencies to outsource. "Far more important than the FAIR Act is the attitude of the agencies' senior leadership and the views of the congressional committees," he said. Outsourcing will go forward faster if the leadership is behind it, he said.

"Congress expresses support for outsourcing in theory, but often they try to stop it in practice," Kelman said. Congressional leaders often worry about government jobs being lost in their home districts, he said. Kelman predicted that outsourcing will grow slowly but steadily "because, at the end of the day, it is just going to make sense."

As agencies move to outsourcing, more competition between government organizations and private companies should be expected, Fortin said, but he noted that this is not necessarily bad.

"Even if federal employees win, there will still be savings for taxpayers, because [the government entity] will have been innovative and reinvented itself," he said.